Improving Global Economic Outlook raises 2010 Growth Forecast for the Philippines

March 15, 2010

MANILA, MARCH 15, 2010—The Philippines is forecast to grow at 3.5 percent this year, owing to a stronger outlook for the world economy, rising deployment of overseas workers that will boost remittances, recovery in private consumption and robust public spending, according to the World Bank’s latest issue of the Philippines Quarterly Update (PQU).

The growth forecast for 2010 represents an upward adjustment from the previous PQU forecast of 3.1 percent. For the year 2011, the Philippines is forecast to achieve a GDP growth of 3.8 percent.

Growth in private consumption is projected to hold up well in 2010,” said Mr. Eric Le Borgne, World Bank Senior Economist who leads the team that prepared the PQU. “The rising precautionary savings that dampened spending in 2009 will likely diminish as consumer expectations gradually improve over the next twelve months.

Other important growth drivers for 2010 include a replenishment of depleted stocks by private companies, and the strong short-term outlook for the Business Process Outsourcing (BPO) sector, said the PQU.

After posting a strong 17 percent growth in deployment of overseas Filipino workers in 2008, deployment growth slowed down but remained robust at 11.7 percent through November 2009. The PQU said this reflects global staffing restructuring induced by the global recession as well as the strong “value-proposition” of Filipino workers in the global labor market, a trend that will strengthen remittances this year.

As an example, the PQU cited the case of the sea-faring industry which has been, and continues to be, sharply affected by the global recession and the collapse in global trade and cruise ship tourism. “The pressure to drastically reduce costs has led some companies to accelerate their staff sourcing from countries such as the Philippines which has a large pool of comparatively cheap, English-speaking, and well qualified sea-farers. As a result, sea-farers’ deployment increased by about 20 percent in the year through November 2009 despite the decline in cargo shipping,” said the PQU.

Produced regularly by the Poverty Reduction and Economic Management (PREM) team from the World Bank Manila office, the PQU provides updates on recent economic developments and policies in the Philippines as well as presents findings from the World Bank’s ongoing work in the country.

The PQU also noted the resiliency of the services sector and the gradual recovery of industry sector after three quarters of negative year-on-year growth, a trend that should strengthen the Philippine economy’s performance this year. Nevertheless, the PQU also stressed that generating inclusive growth that will uplift the living standards of the poor remains a fundamental challenge as poverty incidence is estimated to remain high following a series of shocks that hit the country.

The nation’s poor households, Mr. Le Borgne said, could further be adversely affected by the El Niño dry weather phenomenon and its impact on food production. “A worse-than-expected El Nino could pose serious risks to the country’s growth prospects and trigger larger increases in hunger incidence,” he said.

The PQU also pointed out that the magnitude of the fiscal stimulus implemented by the government in 2009 was “unprecedented in recent Philippine history.” The large fiscal stimulus helped buffer overall economic activity in 2009, but it also “pushed the national government’s primary fiscal balance into its first deficit since 2002, the estimated public sector balance into its first deficit since 2005, and led to its first increase in the non-financial public sector debt-to-GDP ratio since 2003,” the report said.

PQU said: “The fiscal deficit reached 4.1 percent of GDP in 2009, the highest level since the implementation of fiscal reforms in 2005-2006. The increase of the fiscal deficit was broadly evenly divided between higher spending and lower revenue.

As a result, the fiscal structural balance has deteriorated markedly, most of it stemming from the revenue side, PQU said. A large part of the gains from the 2005 fiscal reforms led by the Expanded Value Added Tax implementation has been eroded by the recent introduction of permanent tax cuts or exemptions, it added.

Looking ahead, PQU said that a detailed and credible strategy to reduce the large structural fiscal deficit over time is “crucial to maintaining investor, entrepreneur, and consumer confidence which is necessary for inclusive growth.”

PQU added: “While the Government aims to achieve fiscal balance by 2013, accompanying this commitment with detailed measures (and their likely timing and yield) and embedding them within a medium-term fiscal framework and medium-term expenditure framework would be desirable.

Creating a strong revenue base, PQU said, is crucial to increasing fiscal space needed to support sustained growth and greater spending on people’s health, education and social protection. It recommends a moratorium on tax eroding measures, rationalization of fiscal incentives, simplifying net income taxation to improve compliance among the self-employed and professionals, and adjustments in the excise taxes for tobacco, alcohol and gasoline, among reforms. “Tax administration reforms would boost short-term revenue gains while paving the way for long-term improvement in administrative efficiency,” said the PQU.

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